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Fiscal rules and twin deficits: the link between fiscal and external balances.

Badinger, Harald and Fichet de Clairfontaine, Aurélien and Reuter, Wolf Heinrich (2017) Fiscal rules and twin deficits: the link between fiscal and external balances. The World Economy, 40 (1). pp. 21-35. ISSN 1467-9701

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Abstract

This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materialising through interest rate effects and intergenerational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985-2012. As with previous studies, we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one-third on average and virtually eliminated for countries with the most stringent fiscal rules.

Item Type: Article
Additional Information: Financial Support by the Austrian Central Bank (OeNB, Anniversary Fund, project number: 15469) is gratefully acknowledged. This is the peer reviewed version of the following article, which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/twec.12427. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving. To see the final version of this paper please visit the publisher's website. Access to the published version requires a subscription.
Divisions: Departments > Volkswirtschaft > Internationale Wirtschaft
Forschungsinstitute > Europafragen
Version of the Document: Accepted for Publication
Depositing User: Gertraud Novotny
Date Deposited: 22 Mar 2017 14:26
Last Modified: 12 Sep 2017 17:51
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/76789/
URI: http://epub.wu.ac.at/id/eprint/5480

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